November 1, 2010
The Rating Outlook is stable.
The ratings and Outlook for Martin Marietta are based on the still relatively substantial demand for construction products prompted by federal and state government funding of transportation projects, the relatively small but growing and very profitable specialty products business (dolomitic lime and specialty chemicals), consistent free cash flow generation, and solid liquidity.
The ratings also take into account the operating leverage of the company and the high level of fixed costs. Fitch’s concerns also include weather-related risks, the potential volatility of state and federal spending on highway construction, the cyclical nature of the construction industry and exposure to environmental issues.
The Stable Outlook reflects Fitch’s macro view of Martin Marietta’s various end-markets for the remainder of 2010 and into 2011.
Notably, Martin Marietta’s heritage aggregates volume increased 8.6 percent during the second quarter following 16 quarters of year-over-year volume declines.
Fitch currently expects Martin Marietta’s volume to be up slightly in 2011, with volume gains in public infrastructure and residential construction offset by declines in non-residential construction.
The expected volume gains in infrastructure are due to the continued spending from the stimulus package passed last year, and in particular from the $27.5 billion in additional highway and bridge funding.
All of the stimulus funds have been obligated and about 27 percent of the funds are estimated to have been spent through second quarter of 2010.
The company continued to report higher aggregates pricing during most of this construction downcycle despite significantly lower aggregates shipments. Heritage aggregates pricing increased 1.9 percent in 2009, 6.6 percent in 2008 and 10.2 percent in 2007.
However, this trend reversed during the fourth quarter of 2009 when the company reported a 1.1 percent year-over-year pricing decline. This new trend persisted through the second quarter of 2010 (aggregates pricing fell 3.1 percent during the first quarter and 3.8 percent during the second quarter) and is anticipated to continue for the remainder of 2010 and into 2011.
Aggregates pricing has been negatively affected by geographic and product mix as well as by a higher percentage of shipments to stimulus-related projects, wherein pricing is estimated to be 10-percent below the company’s average price. The company currently forecasts aggregates pricing will decline 1 percent 3 percet in 2010. Fitch also expects aggregates pricing to fall in the low-single digits next year.
Cash flow from operations for Martin Marietta has so far been relatively stable despite the cyclical nature of the construction industry. The company derives about 55 percent of its aggregates shipments from public infrastructure projects, which have been less volatile than commercial and residential construction.
For the latest 12 months (LTM) ended June 30, 2010, Martin Marietta generated $288.1 million of cash flow from operations. This compares to $318.4 million for fiscal 2009 and $341.7 million for fiscal 2008.
Martin Marietta continues to have solid liquidity, with cash of $32.1 million and roughly $398 million of borrowing availability under its revolving and accounts receivable credit facilities as of June 30, 2010. Martin Marietta has sufficient liquidity to deal with $250 million of senior notes maturing in April 2011. The company’s next debt maturity is in April 2012, when its $111.8 million term loan facility becomes due. Martin Marietta remains in compliance with the leverage ratio under its various credit agreements. The company ended the second quarter with a debt-to-EBITDA ratio of 2.84 times (x) compared to the maximum required ratio of 3.50x.
Martin Marietta’s operating results have been negatively affected by the weak aggregates demand across most of the company’s end-markets.
Martin Marietta’s EBITDA declined from $603 million in 2007 to $379.8 million for the LTM period as of June 30, 2010. As a result, the company’s leverage (as measured by debt to EBITDA) has been higher than its normalized target ratio of 2.0x-2.5x. Fitch expects Martin Marietta’s leverage ratio will remain slightly above its target level during 2010 and anticipates the company will be within its leverage target range by the end of 2011
The company has taken a more cautious stance on share repurchases during the past year. Management has committed to suspend share repurchases and indicated that it will only buy back shares if it is within its leverage target. The company has not repurchased any stock since 2007.
Martin Marietta currently has 5.04 million shares remaining under its repurchase authorization.
In the past, the company had regularly made acquisitions and Fitch believes this strategy will continue, although the company has now reached significant scale and may be less likely to do larger acquisitions going forward. In 2008, the company spent $218.5 million on acquisitions, including a $192 million cash payment for the purchase of six quarries in Georgia and Tennessee from Vulcan Materials. (In addition to the cash payment, Martin Marietta also divested several assets to Vulcan.) The company spent $139.2 million on acquisitions during 2009 and $28.1 million through the first half of 2010.
Martin Marietta’s aggregates division (about 90 percent of 2009 sales) markets its products primarily to the construction industry, with about 55 percent of its shipments made to contractors in connection with highway and other public infrastructure projects, 25 percent to commercial construction contractors, 7 percent to contractors of residential construction projects, with the balance of its shipments to chemical, railroad ballast and other projects.
The company’s exposure to fluctuations in commercial and residential construction is somewhat lessened by the company’s mix of public-sector-related shipments, which is typically less volatile than commercial and residential construction due to funding from federal, state and local governments.
Its small magnesia specialties operation (roughly 10 percent of 2009 sales) manufactures and markets magnesia-based chemicals products for industrial, agricultural and environmental applications and dolomitic lime for use primarily in the steel industry.